Question

U.S. GAAP mandates accrual basis accounting for income recognition. However, the statement of cash flows is a mandatory financial statement as a part of a full set of financial statements. Why, if so much emphasis is placed on accrual basis accounting, must a statement of cash flows be presented? What is its purpose and how is it useful to stakeholders? Presenters of such statement may choose to present using the direct or indirect method. Discuss the similarities and differences between these two methods, including a discussion of each of the three sections of the statement of cash flows.

Answer 1

Cash flow statement

The statement of cash flows or cash flow statement is a finacial statement of a company shows the entering and leaving of cash or cash equalents. Cash flow statements helps to identify how the company maintain the cash and how the company deals with the debt by cash. Its mandatory for every companies.

Following are the two methods of cash flow statements

a)Direct Method

In Direct method all the payements and recipts are added and including cash paid to supplier's and cash recieved from customers. This figures are calculated by taking the figures of bigining and end of each accounts and will examin the increase or decrease of many accounts.

b)Indirect Method

In Indirect method cash from operating activities are calculated by taking the net income off companies companies income statement. Reason, The companies income statement prepared on accrual basis.Accrual income means the income which are recognised but not recieved.Indirect method also make adjustment to add back the non operating activities that do not make any effect on companies operating cash flows.The main examble for this one is Depreciation, when added back it to sale only it give proper amount.

Components of Cash flow statements are as follows

1)Cash Flow from Operating Activities

In this, the cash which paid and recieved during the day today operation are called cash from operating activities. In this the non csh operations are added back like depreciation to get real amount of cash movement.

2)Cash Flow from Investing Activities

Cash flow from investing activities shows the movement of cash by the way of buying of longterm asset lije building, Land etc..And it also show the cash flow generated from selling of these assets..

3)Cash Flow from Financing Activities

Cash Flow from Financing Activities shows the cash flow that going outside the entity as intrest to entities investors or divident that distributed to share holders of entity.And it aslo unclude the intrest which paid to bank loans or like that. And it also included the cash which come from outside entity to the entity like cash recieved from shareholders or like that.

This are the methods and components of Cash Flow statements.